# Relationship between trade deficit and borrowing

I have seen lots of essays saying that trade deficit means the nation needs foreign funds to finance their imports. In other words, they need to borrow from the foreigners. However, it sounds very unintuitive to me. My concern is that why would do they have to borrow? I always thought financing trade deficit was all about transferring the ownership of financial assets. Of course, if you count the sale of financial assets as borrowing, we are good.

A) You are right! Its not necessarily "borrowing". People say that only as way of speaking. You could sell your foreign exchange reserves, or sell other foreign assets, or sell local assets.

B) The first logic of calling it borrowing is that typically, that's what happens, a country's governments or its corporations will indeed borrow from foreign investors.

C) The other logic of calling it borrowing is that typically the foreign investors don't want any asset within the CA deficit country, so they buy local assets expecting to sell them in exchange for dollars later on. In that sense, even the sale of local firm's equity, for example, looks a little bit like borrowing, because the foreign investor will sell it for dollars when he gets a chance.

We count the sale of financial assets as borrowing. You simply sell a document indicating that you will pay the buyer in the future, which is simply a debt.

Actually, sales of financial assets cause capital account to increase, so that, current account balance is compensated by the sales of financial assets which is basically a capital account surplus. Hence

$$Current Account + Capital Account = 0$$

Yes selling of financial assets is indeed a borrowing. They are sold to finance the deficits in our own accounts. When in an economy there are more investments than savings, the economy needs to borrow from foreigners which is through through these financial assets.

Investment + Capital Outflow = Savings + Capital Inflow

This is in contrast to the closed economy situation wherein the only demand of capital in domestic investment and only supply is domestic savings. Here, the demand comes from foreigners as well through purchase of their assets. Same way supply can also come from foreigners via the selling of domestic assets. Whenever I > S, there must be a capital inflow.